The hotel warrant: the history and mechanisms of a vanished security system

The world of business financing relies heavily on trust, but also on solid guarantees. Securities, the legal mechanisms that enable a creditor to secure repayment of its debt, take a variety of forms. Some are general, while others, more confidential, have been designed to meet the specific needs of certain business sectors. For over a century, the hotel industry, with its substantial material investments, has benefited from a dedicated tool: the hotel warrant.

Little known to the general public and even to many legal experts today, the hotel warrant was a form of movable security enabling hotel operators to borrow money by offering their equipment as collateral, without having to dispose of it. It was an ingenious idea that originated in the early twentieth century, but now belongs to legal history. The scheme was repealed in 2021. Understanding how it worked in the past is not just a historical exercise; it also provides a better understanding of how security law has evolved and the rationale behind corporate financing today. This article looks at what the hotel warrant was, how it was set up, its practical effects for the parties involved, and the reasons that led to its abolition.

What was the hotel warrant?

At the heart of this mechanism was a simple idea: to enable a hotelier to obtain credit by using as collateral the movable assets necessary for his business (furniture, equipment, tools), while continuing to use them on a day-to-day basis. It was therefore a non-possessory security interestThis is a category of guarantees in which the debtor retains physical possession of the pledged asset, unlike the traditional pledge, which involves handing over the asset to the creditor.

Introduced by a law of 8 August 1913, the hotel warrant system was subsequently incorporated into the French Commercial Code, in articles L. 523-1 et seq. Its purpose was clear: to facilitate access to credit for hotel professionals, a sector that requires major investment in equipment. However, experience has shown that this tool was rarely used. Hoteliers and their creditors often preferred other forms of security, such as pledging the business (which covers more items but can be complex for equipment), the specific pledge of equipment and tools provided for by a 1951 law, or financing techniques such as equipment leasing. It was part of a family of sectoral warrants, such as the oil warrantalso destined to disappear.

This practical obsolescence, combined with a desire to simplify and modernise security law, led the legislator to simply repeal the hotel warrant system. L'order no. 2021-1192 of 15 september 2021 reforming the law on sureties has put an end to its legal existence (via article 28, 4° of the ordinance).

In legal terms, its exact nature has been the subject of doctrinal debate. Some saw it as a genuine pledge, despite the absence of dispossession, relying on the terminology of the law itself. Others described it more as a movable mortgage, emphasising the organised publicity and the absence of transfer of possession. A third approach was to consider it as a security interest. sui generisIt is irreducible to the classic categories. Be that as it may, case law tended to apply the rules of pledging, in particular by recognising a form of fictitious possession by the creditor.

How was a hotel warrant put together?

Setting up a hotel warrant was subject to precise rules, concerning both the people and goods eligible and the administrative procedure to be followed.

Conditions relating to people and property

Only the hotel operators could use the hotel warrant. This concept was understood quite strictly: it referred to establishments offering accommodation (with or without catering), but excluded simple restaurants, cafés or furnished lets without associated hotel services. The operator could be the owner of the building or simply a tenant. However, the operator had to be owner of the furniture and equipment he intended to warrant. A free manager, for example, could not generally create such a warrant on assets belonging to the owner of the business. Logically, the operator also had to have the legal capacity to dispose of these assets, since the warrant could lead to their sale in the event of non-payment.

The basis of the warrant, i.e. the goods that could be guaranteed, included the commercial furniture, equipment and tools used in the business. Significantly, this even included property that would normally be considered immovable by destination (for example, equipment attached to the building but used specifically for hotel operations). On the other hand, items that fluctuated too much, such as supplies or goods, were excluded. Similarly, it was forbidden to pledge goods already subject to an unpaid vendor's lien, another pledge or a pledge (such as that arising from the 1951 law on equipment). Finally, a principle of uniqueness applied: only one warrant could be issued for the same objects.

As for the secured debt, the law was restrictive: the hotel warrant could only guarantee a specific amount. loan. It could not be used to secure a pre-existing debt of any other kind. On the other hand, neither the reason for the loan nor its amount was limited by law.

The set-up procedure

The constitution of the warrant was subject to a fairly cumbersome formal procedure designed to ensure that third parties were informed and that the creditor was protected.

A prior step was necessary if the hotelier was not the owner or usufructuary of the building in which he operated his hotel. He then had to notify your intention to borrow by bailiff's writ to the owner (or his agent), specifying the nature and value of the goods to be warranted and the amount of the proposed loan. This notification had to be accompanied by a letter sent via the registry of the district court. The owner then had fifteen days to oppose to the loan, but only if he could provide evidence of unpaid rent (rent due, six months in arrears and six months to come). If no response was received within the deadline, this was deemed to be tacit acceptance.

The next stage consisted of a detailed declaration to the commercial court registry in whose jurisdiction the hotel was located. This declaration had to contain a wealth of information: identity of the parties (borrower and lender), precise description of the warranted property enabling it to be identified and valued, statement that there were no other liens or pledges on the property, information on compulsory fire insurance, amount and maturity of the secured debt, details of the notification to the owner and any response, amount of the rent and proof of payment of the required rents.

The court clerk entered these details on a special counterfoil and steering wheel register. He then detached the wheel, which constituted the warrant document itself, and handed it to the borrower against signature on the counterfoil.

In order for the warrant to benefit the lender, the borrower had to transfer it to the lender by a first endorsementdated and signed. This first endorsement is essential for publicity purposes and to be valid against third parties. transcribed on the registry register by the lender within a strict period of five days. The court clerk would record this transcription on the warrant itself.

In addition to publicity, any potential lender (or the hotelier himself for his own funds) could obtain from the registrar a statement of registered warrants or a certificate of non-registration. The registration of the warrant was valid for a period of five yearsHowever, it could be renewed before the expiry of this period. If it was not renewed, it was automatically struck off. Striking off also occurred, of course, if the debt was repaid or discharged by the creditor.

Penalties incurred

Failure to comply with these rules could result in civil and criminal penalties. In criminal terms, article L. 523-13 (repealed) of the French Commercial Code was severe. A borrower who made a misrepresentation (for example on the ownership of the goods or the absence of other pledges) or who constituted a warrant on goods not belonging to him or already encumbered, incurred the penalties of thescam. If it deliberately diverted, dissipated or damaged the warranted goods to the detriment of the creditor, he was exposed to the sanctions of thebreach of trust.

There were several possible civil consequences:

• La nullity The warrant could be declared null and void if it was issued by a person who was incapable or not qualified to operate a hotel. The omission of information deemed essential on the warrant (such as the identity of the parties, the description of the goods or the amount of the claim) could also result in nullity.
• L'not enforceable was the penalty for failure to comply with certain publicity formalities. Thus, if prior notice had not been given to the lessor of the property, the warrant could not be enforced against him, allowing him to enforce his own lien without restriction. Similarly, failure to transcribe the first endorsement within the time limit rendered the pledge unenforceable against third parties.

Transmission and circulation of the warrant

The hotel warrant was designed as a promissory notewhich means that it could be easily transferred from one creditor to another through theendorsement. The initial lender could then "mobilise" its claim, i.e. sell it to a bank or another investor simply by endorsing the security.

Subsequent endorsements had to be dated and signed, and indicate the name of the new beneficiary (the endorsee). Unlike the first endorsement, subsequent endorsements did not have to be entered in the court registry. However, a special formality was provided for: each new bearer (discounter, rediscounter) had to notify the court clerk of the endorsement by registered letter within eight days. The clerk of the court noted these notices on the counterfoil of his register. The aim was to enable the borrower, if he wished to repay early, to know the identity of the current holder of the security. However, the hotelier could, from the outset, exempt successive holders from this notification formality, which had the effect of paralysing his own option of early repayment.

The endorsement of the warrant transferred not only the debt but also the real guarantee (the pledge on the equipment). It also produced the classic effects of an endorsement of a commercial paper. In particular, all the signatories to the warrant (the initial borrower and all successive endorsers) were jointly and severally liable to the last holder. The latter also benefited from the principle ofnon-invocability of exceptionsIn other words, it could not be used as a defence against the original lender or a previous holder (with limited exceptions, such as the nullity of the instrument on the grounds of incapacity).

What were the rights and obligations of each party?

The hotel warrant created a set of specific obligations and rights for the borrowing hotelier (the debtor) and the lender (the warrant holder).

The duties and prerogatives of the hotelier (debtor)

The hotelier's main obligation was to retain custody of the warranted goods on the premises of his establishment and to ensure their safekeeping. Since he retained the use of the goods, he was liable to the creditor. He was liable in the event of loss or deterioration, except in cases of force majeure. If, through his own fault, he diminished the value of the pledge (for example, by selling part of the equipment without authorisation or by allowing it to deteriorate), he could be deprived of the benefit of the term, meaning that the creditor could demand immediate repayment of the loan. The hotelier also had to insuring property against fire for the duration of the loan.

In return, the hotelier retained certain important rights. He could sell the warranted assets out of courtHowever, the law specified that the "tradition", i.e. the physical handover of the property to the purchaser, could only take place with the formal agreement of the lender. However, the law specified that the "tradition", i.e. the physical handover of the property to the purchaser, could only take place ifafter the creditor has been paid in full. In practice, the hotelier had to use the sale price to reimburse the warrant holder before delivering the goods, on pain of committing the offence of misappropriation of a pledge.

The hotelier also had the option of repay the loan earlyeven if the warrant holder refused. He could then deposit the sum due. In the event of early repayment, he was entitled to a reduction in interest corresponding to the remaining period, less a fixed period of ten days. However, this option was not available if the warrant holder was exempted from the obligation to notify the registry of endorsements.

The position of the creditor (warrant holder)

The warrant holder had rights before and after the maturity of the debt.

Before the deadlineIn this case, he could transfer the security by endorsement. To maintain the effectiveness of his guarantee, he had to ensure that renew registration to the registry before the five-year period expired. Above all, case law recognised that it had a right of appeal. right of retention over the warranted assets. Although he did not have physical possession, this "fictitious" possession gave him a strong position, particularly in the event of the debtor's insolvency proceedings.

At maturityIf the hotelier failed to repay the loan, the warrant holder first had to repeat his request by registered letter. Failing payment, he could then realise your pledge. The law offered him two main options:

1. La forced sale by public auction It followed, by reference from the law on hotel warrants, the rules laid down for the realisation of a pledge on a business. This involved a procedure before the commercial court, with a prior summons to pay, the drafting of specifications and publicity. The bearer was paid directly from the sale price.
2. L'judicial award The bearer could also apply to the courts for the warranted assets to be assigned to him in payment of his claim, after an expert valuation. This option, more widely recognised by case law for commercial pledges, enabled the holder to avoid the risks of an auction and the involvement of other creditors.

The bearer benefited from a preferential right on the sale price of the warranted goods. It ranked highly: it took precedence over most other creditors, with the notable exception of legal costs, the Treasury for certain direct taxes, and possibly costs incurred for the preservation of the pledged assets after the warrant had been issued. However, his ranking could be affected by specific conflicts:

• With the lessor of the building If the lessor had validly objected to the creation of the warrant (or if he had not been given notice), his lien took precedence without limitation. If there had been no valid objection, the lessor's lien remained but took precedence over that of the bearer, except for a sum corresponding to 18 months' rent, for which he retained priority in certain cases.
• With the mortgage creditors real property: When the warrant related to equipment that had become real property by destination, the conflict was settled on the basis of the respective dates of the transcription of the first endorsement of the warrant and the mortgage registration. In the event of damage (fire in particular), the holder's preferential right was transferred to theinsurance indemnity.

Finally, it was generally accepted that the holder of the warrant had a resale rightIn theory, this allowed him to claim the warranted goods even if they had been sold and were in the hands of a third party purchaser. However, the effectiveness of this right was very limited in practice by the fundamental rule that "in matters of movable property, possession is equivalent to title" (article 2276 of the Civil Code), which protects purchasers acting in good faith. Publicity at the registry was generally not considered sufficient to establish the buyer's bad faith.

What happens to the hotel warrant in the event of the hotelier's insolvency?

The opening of safeguard, reorganisation or liquidation proceedings against the hotelier had significant consequences for the warrant holder's rights. For a long time, the central issue was the effectiveness of his fictitious right of retention in this context. Case law finally accepted that this right of retention conferred an advantageous position on the warrant creditor, even if the law on insolvency proceedings does impose limitations.

During the observation periodAlthough individual lawsuits were suspended, the insolvency administrator could choose to pay the warrantist creditor in order to "lift the option" and allow the company to continue to use the pledged asset. However, a more recent provision of the French Commercial Code renders the fictitious right of retention unenforceable during this period (and during the execution of a plan), unless the asset is included in a transfer of business. The situation is therefore complex.

If a safeguard or recovery plan was adopted, the warrant holder was subject to the payment deadlines imposed by the plan. He retained his guarantee, but in the event of subsequent realisation of the assets, he had to bear the priority of claims arising after the opening judgment ("privilège de la procédure" or "argent frais") and the superprivilège des salaires.

In the event of disposal plan of the hotel, the burden of the warrant was generally transferred to the transferee, who then had to repay the creditor in order to be able to freely dispose of the property acquired.

Finally, in the event of compulsory liquidationAt the same time, the liquidator proceeded to sell the hotelier's assets. The warrant holder exercised his preferential right over the sale price of the warranted goods. By being recognised as the holder of a right of retention, he was able to rank ahead of certain subsequent preferential creditors. Above all, he retained the right to apply for the judicial allocation of the pledged assets, thereby avoiding competing with other creditors for the sale price.

Why has the hotel warrant been repealed?

Several factors explain the disappearance of this century-old legal system. The first is undoubtedly its gradual obsolescence. As mentioned above, the hotel warrant was used relatively little in practice. Hotel professionals and their financial partners often preferred other guarantee or financing mechanisms that were considered to be more flexible, better known or covering a different base: the pledge of a business, the pledge of equipment and tools governed by the 1951 law, equipment leasing, or the retention of title clause for equipment suppliers.

This low level of use may be explained by the cumbersome formalities (double notification to the lessor, detailed declaration to the registry, transcription of the first endorsement, notice of subsequent endorsements, etc.) and by certain legal uncertainties which may have surrounded its regime (legal nature, actual effectiveness of droit de suite, etc.).

Ultimately, its repeal is part of a wider movement of simplification and modernisation of securities lawThe aim was to make the guarantee system clearer and more efficient by eliminating obsolete or redundant tools. The aim was to make the system of guarantees clearer and more efficient, by eliminating obsolete or redundant tools. Securities such as general shop warrantwhich allows goods to be pledged in warehouses, remain in force and have been clarified. It should be noted that the need to secure financing with tangible movables without dispossession can now be met by the general non-possessory pledge of movable tangible propertywhich was reformed and clarified by the same ordinance. For a practical guide on this safety issue, consult our resources.

Although the hotel warrant is now a thing of legal history, securing the financing of your business or guaranteeing your receivables remains essential. For a personalised analysis of the securities that are relevant today, our team is at your disposal.

Sources

• Order no. 2021-1192 of 15 September 2021 reforming the law on securities (in particular article 28, 4°, repealing articles L. 523-1 to L. 523-16 of the French Commercial Code).
• Commercial Code, former articles L. 523-1 to L. 523-16 (repealed hotel warrant regime).